Educomp + Everonn Outperformers – Credit Suisse

December 13, 2007

Behind the attractive India growth story lies a hidden truth the education system is in a sorry state. India’s education sector could see long-term secular growth with rewards for early movers in the K-12 segment. Credit Suisee has initiated coverage on Educomp and Everonn with an OUTPERFORM rating.

Inefficient spending by the government sector and restrictive regulations hobbling private participation has led to a significant demand-supply gap. The market is large, with an addressable population of 460 mn children and annual spending higher than US$50 bn.

New models are emerging for the private sector to participate in K-12 education. Strong growth would be driven by: 1) increased outsourcing by government and private schools in the near term (one to three years), 2) own school business in the medium term (three to seven years) and 3) the use of the Internet to impart education in the longer term. Over the next five years, this segment is expected to lead to an operating profit CAGR of 100% for Educomp and 72% for Everonn.

Educomp Solutions:Educomp has consistently surprised the street on upside in its operating metrics. Since the company is in early stage growth phase, quarterly volatility could remain high, in our view. But the management has been promising less and delivering more consistently.

Based on DCF model, Credit Suisse arrives at a target price of Rs 5,235 for the company, representing 30% potential upside from current price. The company is likely to report an EPS of Rs 71.21 and 122 for FY08 and FY09 respectively.

Everonn Systems:Current investor expectations are based on the very limited operating data available and management guidance for FY08. Hence the initial few quarters will play an important role in moulding investor expectation.

Due to the high growth profile of the company, Credit Suisse values the stock on a DCF model with 10.6% WACC, strong near-term growth, 12% medium growth and 3% terminal growth. The company is likely to report an EPS of Rs 17.20 and Rs 28.19 for FY08 and FY09 respectively. The target price for Everonn is Rs 785.